i

HOW TO AVOID BURSTING YOUR BUBBLE: A BRIEF HISTORY AND ANALYSIS

OF I.R.C. § 368(A)(1)(F)

AND

RELATED REGULATIONS

By Brendan J. Fleming

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TABLE OF CONTENTS

I. Introduction…………………...……………………………………………………...1

A. Summary of income tax consequences of corporate transactions….....………1

B. Common scenarios in which F Reorganizations occur………….……………..3

II. A Brief History of the F Reorganization…………..……………………………..…5

A. Statutory and Case Law Development………………………………………….5

B. Regulations….…………………………………………………………………….6

1. 2004 Proposed Regulations and Comment Letter………………………..6

2. 2005 Final Regulations…………………………………………………...8

III. 2015 Final Regulations ………………………………………………………………9

A. Preamble to 2015 Final Regulations..………………………………………...…9

B. “F in a Bubble” Concept………………………………………………………..10

C. Specific Requirements Set Forth in Final Regulations…………………….…15

1. Resulting corporation stock distributed in exchange for transferor

corporation stock………………………………………………………...16

2. Identity of stock ownership………………………………………….…..18

3. Prior assets or attributes of resulting corporation………….…………..20

4. Liquidation of transferor corporation…………………………………..21

5. Resulting corporation is the only acquiring corporation…………….…21

6. Transferor corporation is the only acquired corporation………………23

IV. Comments and Recommendations Concerning Open Issues…………………..…24

A. Overlap and Non-integration Application………………………………….…24

B. Revenue Ruling 68-349: Does it Contradict Final Regulations?.......................26

C. Distributions: How much is too much?………………………….…………….26

D. EIN Issues……………………………………………………………………….28

E. Is F reorganization treatment available for reverse mergers?........................30

V. Conclusion…………………………………………………………………………..33

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I. Introduction

Effective September 21, 2015 the Internal Revenue Service (“IRS”) and the U.S. Department

of the Treasury (“Treasury”) issued final regulations (the “2015 Final Regulations”) that provide

guidance regarding the qualification of a transaction as a corporate reorganization under section

368(a)(1)(F)1 by virtue of being a mere change of identity, form, or place of organization of one

corporation (“F reorganization”).2 The Preamble to the Final Regulations summarizes an F

reorganization as “the simplest and least significant of corporate changes” and “the surviving

corporation is the same corporation as the predecessor in every respect, except for minor or

technical differences.”3 These Final Regulations provide legal practitioners with a long awaited

clarification of how to successfully navigate an F reorganization. However, there remain several

issues that muddy the waters of an otherwise clear cut set of guidelines. Parts II and III of this

paper will briefly summarize the evolution of the F reorganization—from the initial statutory

definition, to the 2015 Final Regulations. Part IV will then discuss the potential issues that remain

outstanding after the 2015 Final Regulations and the potential resolutions of or recommendations

related to those issues. This paper concludes that the carefully crafted construction of the 2015

Final Regulations has created a new kind of certainty for practitioners. Yet, there are still several

issues that require clarification from the Treasury and IRS.

A. Summary of income tax consequences of corporate transactions

The exchange of property typically has significant tax consequences. Consider the

following scenario: corporation A (a Texas corporation) merges with newly formed corporation

1 Unless otherwise indicated, all references to a “§,” “section,” or “sections” are to a section or sections of the Internal

Revenue Code of 1986, as amended. 2 See generally T.D. 56905, 80 Fed. Reg. 56,904 (Sept. 21, 2015) (“hereinafter “Preamble”). 3 Preamble, at 56905.

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B (a Delaware corporation) by merging with and into corporation B, with corporation B surviving.

Corporation A’s shareholders would likely incur a taxable gain or loss on the exchange of their

stock for the stock of corporation B.4 But, what if the historic shareholders of corporation A were

the same shareholders as those of the surviving corporation B? This scenario may involve a mere

readjustment of the corporate structure (change in identity) of corporation A and shouldn’t be

subject to the recognized gain provisions of Internal Revenue Code (the “Code”) section 1001(c).

Generally, section 1001(c) of the Code provides that upon the exchange of property, the gain or

loss realized from the conversion of property into cash, or from the exchange of property for other

property is treated as income or as loss sustained.5 The purpose of the reorganization provisions

of the Code is to except from the general rule of section 1001(c) specifically described exchanges

incident to such readjustments of corporate structures which effect only a readjustment of

continuing interest in property under modified corporate forms.6 These exchanges must be made

in pursuance of a plan of reorganization.7 Section 368(a)(1) describes several types of

transactions that constitute reorganizations.8 The F reorganization, described in section

368(a)(1)(F), is “a mere change in identity, form, or place of organization of one corporation,

however effected”9 and is exempt from recognizing the gain or loss as provided in section

1001(c). F reorganizations are considered ‘‘single-entity’’ reorganizations.10 That is to say, F

reorganizations apply only to a ‘‘mere change’’ in corporate structure of one corporation and do

not involve the combination of two separate corporations.11 This “single entity” theory will be

4 Treas. Reg. § 1.1001-1(a). 5 See generally Treas. Reg. §§ 1.1001-1(a)-(c). 6 See Treas. Reg. § 1.368-1(b). 7 Id. at § 1.368-1(c). 8 § 368(a)(1)(F). 9 Id. 10 See generally Boris I. Bittker and James S. Eustice, Federal Income Taxation of Corporations and Shareholders,

¶12.28 (7th ed. 2008). 11 Id.

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explored in detail as this paper progresses through the history and evolution of the F

reorganization.

Without the protection of the F reorganization, a simple reincorporation of a single entity

in a new state (as discussed above) would subject the transferor corporation’s shareholders—who

would be receiving shares in the resulting corporation—to unnecessary and arbitrary tax

consequences in accordance with section 1001(c) of the Code.

B. Common scenarios in which F reorganizations occur

An F reorganization may arise in a variety of scenarios. In practice, the F reorganization may

be implicated when changing a corporation’s name, state of incorporation, or when facilitating a

check-the-box election,12 among other more complex transactions.13 An F reorganization may

result in a check-the-box election when a parent corporation merges with a wholly owned

subsidiary by exchanging parent company stock for stock of the subsidiary. The subsidiary then

becomes the holding company of parent company. Parent company can then convert into a limited

liability company and elect (i.e. “check-the-box”) to be treated as a disregarded entity.14 See figure

1 below. The above mentioned transactions are typically consummated by and through the merger

of two or more entities—which provides for a corporation transferring assets or stock (“transferor

corporation”) and a corporation receiving the assets or stock (“resulting corporation”). F

reorganizations enjoy different—and potentially beneficial—tax treatment than other types of

12 JAMES S. EUSTICE, THOMAS BRANTLEY, FED. INCOME TAX'N OF CORP. & SHAREHOLDERS, ¶ 2.02, (“An eligible

entity with multiple members can elect to be a partnership or a corporation . . . The default rules (where no election is

made) are in Regulations § 301.7701-3(b) . . . . For domestic entities, partnership status will result if the entity has

multiple members; the entity will be disregarded if it has a single owner . . . . Of course, any of these default rules can

be overridden by a specific election.”). 13 Michael Kliegman, Nancy Chen, Some Ado About a Nothing: Final F Reorganization Regulations, Tax

Management Memorandum, 57 TMM 135 (Apr. 4, 2016). 14 See generally I.R.S. PLR 201236014 (IRS PLR Sept. 7, 2012).

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corporate reorganizations under section 368 of the Code.15 Some of these differences include the

following: (i) the taxable year does not close;16 (ii) losses can be carried back to pre-reorganization

years;17 and (iii) the resulting corporation continues to use the same employer identification

number (“EIN”) as the transferor corporation.18 The exception from the general rule of section

1001 of the Code has made the F reorganization an attractive objective for many firms

contemplating a corporate reorganization. However, with complicated tax driven transactions,

often come confusion and uncertainty. The F reorganization guidelines have been relatively

unclear for decades. Yet, there is hope that with the issuance of the 2015 Final Regulations, the

blurred lines of the F reorganization will finally be clear.

Figure 1: Illustration of a check-the-box election

15 See generally §§ 368(a)(1)(A)-(G). 16 § 381(b). 17 Id.; see also Treas. Reg. §§ 1.381(b)-1(a)(2). 18 Rev. Rul. 73-526.

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II. A Brief History of the F Reorganization

A. Statutory and Case Law Development

First appearing in 1921,19 the F reorganization was introduced in order “to characterize as

one continuing entity, a corporation that moved its domicile by reincorporating in another state or

that made some other formal changes."20 Initially, the limited scope of the F reorganization created

little uncertainty in that it applied only to formal corporate changes that did not alter the entity's

status as a taxpayer.21 Recognizing the F reorganization’s narrow scope, in 1942 the United States

Supreme Court in Helvering v. Southwest Consolidated Corp. held that “an (F) reorganization

must have resulted in no shift of corporate ownership.”22 In that holding, the Court rejected an

argument that an insolvency reorganization under which the secured creditors of a corporation

succeeded to majority control constituted an F reorganization, stating: "a transaction which shifts

the ownership of the proprietary interest in a corporation is hardly a mere change in identity, form,

or place of organization."23 The lack of guidance concerning F reorganizations often led to

“substance over form” analysis by the courts.24 Further, the Supreme Court in Commissioner v.

Court Holding Co. held that “To permit the true nature of a transaction to be disguised by mere

formalisms, which exist solely to alter tax liabilities, would seriously impair the effective

19 Int. Rev. Code of 1921, ch. 2, § 202(c)(2), 42 Stat. 230 (now I.R.C. § 368(a)(1)(F)). Section 202 originally defined

an (F) reorganization as a "mere change in identity, form or place of organization of a corporation. Id.

20 Carrybacks and the (F) Reorganization, 19 Wm. & Mary L. Rev. 555, 556-57 (1978)(citing S. REP. No. 2090, 85th

Cong., 2d Sess. 61, reprinted in [1958] U.S. CODE CONG. & AD. NEWS 4454, which discussed the exemption from

a stamp tax of stock delivered pursuant to an (F) reorganization.); See Columbia Gas, Inc. v. United States, 366 F.2d

991 (Ct. Cl. 1966). 21 § 381(b)(1)-(2); See generally Rev. Rul. 64-250, 1964-2 C.B. 333; Rev. Rul. 54-269, 1954-2 C.B. 114. 22 Helvering v. Southwest Consolidated Corp. 315 U.S. 194, 202 (1942). 23 Id. at 202-203. 24 Commissioner v. Court Holding Co., 324 U.S. 331, 334 (1945).

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administration of the tax policies of Congress.”25 This substance over form analysis—sometimes

referred to as the “economic reality test”—was applied to prevent potential abuse of the somewhat

“flexible” and generally undefined F reorganization. This analysis was used by courts to look at

what the actual intent or economic purpose was for the potential F reorganization as opposed to

simply looking at whether specific requirements were met.

Over time, the F reorganization slowly evolved and was largely thought to have to be tested

against four requirements: (i) it must involve only one corporation;26 (ii) it may not substantially

change the reorganized corporation’s shareholders or assets;27 (iii) it must have a bona fide, non-

tax business purpose;28 and (iv) it must be executed pursuant to a plan of reorganization.29 The

problem was that these four requirements failed to adequately tailor the F reorganization to allow

practitioners a comfortable level of certainty when navigating complex transactions. As a result

of this still vague set of rules, the Treasury and the IRS issued Proposed Regulations in 2004.30

B. Regulations

1. 2004 Proposed Regulations and Comment Letter

In 2004, Treasury and the IRS issued proposed regulations (the “2004 Proposed Regulations”)

and requested comments.31 The 2004 Proposed Regulations provided that if a corporation met

four requirements in undergoing a reorganization, the resulting corporation would be treated as the

equivalent of the transferor corporation (treated as a “mere change”).32 The 2004 Proposed

25 Id. 26 See H.R. Com. Rep. No. 97-760. 27 See generally Helvering v. Southwest Consolidated Corp., 315 U.S. 194 (1942). 28 See Treas. Reg. § 1.368-2(g). 29 See Treas. Reg. § 1.368-1(c). 30 Notice of Proposed Rulemaking, Reorganizations Under Section 368(a)(1)(E) or (F), REG-106889-04, 69 Fed. Reg.

49,836 (Aug. 12, 2004). 31 Id. 32 Id.

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Regulations also proposed to reject the continuity of interest and continuity of business enterprise

requirements for F reorganizations. These two requirements are applicable to several other

reorganizations under section 368(a)(1).33 Under the 2004 Proposed Regulations, a potential F

reorganization had to be tested against four requirements:34

1. All of the stock of the resulting corporation, including stock issued before the transfer, was

issued in respect of stock of the transferring corporation;

2. There was no change in the ownership of the corporation in the transaction, except a change

that had no effect other than that of a redemption of less than all the shares of the

corporation;

3. The transferring corporation completely liquidated in the transaction; and

4. The resulting corporation did not hold any property or have any tax attributes (including

those specified in section 381(c)) immediately before the transfer.35

The 2004 Proposed Regulations elicited only one Comment Letter.36 The Commenter requested

clarification of the treatment of combinations of several corporations into a single, newly-created

corporation.37 For example, the Commenter questioned the scenario where T1 transfers all of its

assets to Newco and immediately thereafter, unrelated T2 transfers all of its assets to Newco. The

Commenter requested that the regulations should clarify that the first combination will be treated

as an F reorganization.38 The Commenter then went on to say:

“[The] issue becomes more problematic if T1 and T2 transfer their assets to

Newco simultaneously . . . . [W]e recommend that the regulations permit the

33 See generally §§ 368(a)(1)(A)-(D). 34 See supra note 29. 35 Id. 36 KPMG Comments Regarding IRS Rules (T.D. 9182, REG-106889-04) on Recapitalization and Change-in-Form

Reorganizations, Daily Tax Rep. G-9 (Mar. 4, 2005). 37 Id. 38 Id.

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taxpayer to elect which combination will be treated as the section 368(a)(1)(F)

reorganization. In substance, this is the same as non-simultaneous transfers, in

that the taxpayers can choose which occurs first.”39

As discussed below, the 2015 Final Regulations acknowledge this commenter’s concerns by

providing that only one transferor corporation can transfer property to the resulting corporation in

a potential F reorganization.40 If more than one corporation transfers assets to the resulting

corporation, then none of the transfers would constitute an F reorganization.41

2. 2005 Final Regulations

In 2005, Treasury and the IRS published final regulations adopting a portion of the 2004

Proposed Regulations (the “2005 Final Regulation”).42 The most notable addition to the 2005

Final Regulations was that it eliminated the continuity of interest (“COI”) and continuity of

business enterprise (“COE”) requirements generally required in reorganizations under section 368

of the Code.43 The preamble explains that the COI and COE requirements are not necessary to

protect the policies underlying the F reorganization provisions because of the strict “mere” change

aspect, which prevents the sale of a corporation under 368(a)(1)(F).44 One author noted that the

elimination of these requirements is “the most straight-forward way to apply the F in a bubble

concept to ignore subsequent asset changes inside the corporation and changes of shareholders that

39 Id. 40 Preamble, at 56,904; See also Treas. Reg. § 1.368-2(m)(1)(v). 41 Id. 42 Reorganizations Under Section 368(a)(1)(E) and Section 368(a)(1)(F), T.D. 9182, 70 Fed. Reg. 9219 (Feb. 25,

2005). 43 Id.; COE generally requires that an issuing corporation either continues the target corporation's historic business or

use a significant portion of target corporations historic business assets in a business. See 26 C.F.R. § 1.368-1(d); COI

generally requires that in substance a substantial part of the value of the proprietary interests in a target corporation

be preserved in the reorganization. See Treas. Reg. § 1.368-1(e). 44 Supra note 29 at 49,836.

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might occur in related transactions.”45 The “F in a bubble” concept is discussed in Part III of this

paper.

III. 2015 Final Regulations

A. Preamble to the 2015 Final Regulations

In September of 2015, the Treasury Department and the IRS issued Final Regulations (the

“2015 Final Regulations”) to provide guidance on the qualification of transactions as corporate

reorganizations under 368(a)(1)(F).46 The 2015 Final Regulations generally adopt the provisions

of the 2004 Proposed Regulations not previously adopted in the 2005 Final Regulations, while also

adding additional requirements.47 These 2015 Final Regulations are effective for and applicable

to transactions occurring on or after September 21, 2015.48 The Preamble to the 2015 Final

Regulations summarizes the concept and requirements of an F reorganization as follows:

[T]he Final Regulations are based on the premise that it is appropriate to treat

the Resulting Corporation in an F reorganization as the functional equivalent of

the Transferor Corporation and to give its corporate enterprise roughly the same

freedom of action as would be accorded a corporation that remains within its

original corporate shell. The Final Regulations provide that a transaction that

involves an actual or deemed transfer of property by a Transferor Corporation

to a Resulting Corporation is a Mere Change that qualifies as an F reorganization

if six requirements are satisfied (with certain exceptions).49

Part B below, discusses in detail, the process of testing a transaction against the six requirements

outlined in the 2015 Final Regulations.50 Additionally, the concept of the “F in a bubble” is

discussed to aid in determining which steps in a multi-step transaction should be considered when

45 See Jasper L. Cummings, Jr., A General Theory of F Reorganizations, Tax Notes 1193 (Dec. 10, 2012). 46 See generally T.D. 9739, 80 Fed. Reg. 56,904 (Sept. 21, 2015). 47 Id. 48 Id. 49 Id. 50 Treas. Reg. § 1.368-2(m)(1).

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applying the six requirements to a potential mere change—often referred to as: what steps occur

“in the bubble?”

B. The “F in a Bubble” Concept

Like the Proposed Regulations of 2004, the Final Regulations largely adopt the “F in a

bubble” concept.51 This concept has routinely been applied to allow F reorganization designation

to a transaction which is merely a “step” in a larger transaction that is not a mere change in identity,

place, or form. Typically, the step transaction doctrine is cited by courts as a means to allow what

is essentially a single transaction to be broken up into multiple independent transactions.52 The

step transaction doctrine’s purpose is to condense or re-characterize supposedly separate steps of

a transaction into a single step or a different transaction to insure that the substance of a transaction

governs as opposed to its form.53 Because F reorganizations are construed to be “mere” changes

to identity or form of a corporation, they are granted protection from the step transaction doctrine.54

This protection is commonly referred to as the “F in a bubble” concept.

If an F reorganization is a step in a larger transaction which is not a mere change, then the

corporate reorganization under 368(a)(1)(F) must begin and end within a set period (the

reorganization steps must occur within the “bubble”).55 For example, other corporate changes,

such as issuance of new equity or the transfer of shares to new shareholders could not have been

effected simultaneously with the potential F reorganization, but could have occurred before or after

51 Preamble, at 56907. 52 Id. 53 See http://www.bna.com/step-transaction-doctrine-n2147485169/; See also, Assoc. Wholesale Grocers, Inc. v. U.S.,

927 F.2d 1517, 1521 (10th Cir. 1991); King Enters., Inc. v. U.S., 418 F.2d 511, 517 (Ct. Cl. 1969). 54 See Rev. Rul. 75-456, 1975-2 CB 128 (F reorganization of the acquiring corporation in a stock reorganization under

section 368(a)(1)(B) did not prevent that provision's “solely for voting stock” requirement from being satisfied); see

also Rev. Rul. 79-250, 1979-2 CB 156 (F reorganization of issuing corporation immediately after forward triangular

merger did not prevent the transaction from satisfying requirements of section 368(a)(2)(D)). 55 Preamble, at 56907.

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the F reorganization “in a bubble.”56 The time period which represents the “bubble” commences

when the transferor corporation begins to transfer assets to the resulting corporation, and ends

when the transferor corporation completely liquidates for federal income tax purposes and the

stock of the resulting corporation is distributed to the former owners of the transferor corporation.57

As discussed above, the 2004 Proposed Regulations articulated a “related events rule” in

order to establish the “bubble” protection for F reorganizations.58 The rule held that related events

preceding or following the transaction or series of transactions that constitute a mere change do

not cause that transaction or series of transactions to fail to qualify as an F reorganization59 and

qualification of the mere change as a reorganization under §368(a)(1)(F) will not alter the treatment

of the larger transaction.60

The application of the related events rule is illustrated in the following example.61 A owns

all the stock of T. Unrelated P owns all the stock of S. T and S are State M corporations engaged

in manufacturing businesses. Under a plan, the following transactions take place in the following

order: (1) T merges into S, with A receiving solely stock of P; (2) P changes its state of

incorporation by merging into New P; and (3) New P redeems A’s P stock (issued in respect of his

T stock) for cash. Applying the ‘‘related events’’ rule, the merger of P into New P qualifies as an

F reorganization (related events preceding or following the ‘‘mere change’’ do not cause such

mere change to fail to qualify as an F reorganization). The qualification of the merger of P into

New P as an F reorganization does not alter the tax treatment of the merger of T into S. Because

56 Id. 57 Id. 58 Prop. Reg. §1.368-2(m)(3)(ii). 59 Id. 60 Id. 61 Id.

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P shares received by A with respect to the T shares are redeemed for cash pursuant to the plan, the

merger of T into S does not satisfy the continuity of interest requirement and does not qualify as a

reorganization under §368(a)(1)(A) by reason of §368(a)(2)(D).

In a 1996 revenue ruling, the IRS treated as two separate transactions a reorganization

under § 368(a)(1)(F) and a reorganization under § 368(a)(1)(C) undertaken as part of the same

plan.62 The ruling provided a scenario where corporation A changed its place of organization by

merging into a corporation formed under the laws of another state (state B) and immediately

thereafter, it transferred substantially all of its assets in exchange for stock of an unrelated

corporation.63 The ruling holds that the reincorporation by A in state B qualifies as a

reorganization under § 368(a)(1)(F) even though it was a step in the transaction in which A

acquired the business of another corporation.64 The “bubble” protected part of the above

transaction from losing its F reorganization qualification. The F in a bubble concept is imperative

due to the nature and circumstances of many F reorganizations.

The 2015 Final Regulations generally adopted the “bubble” protection as affirmed in Rev.

Rul. 96-29, which provided two fact patterns to further clarify the effect of the “bubble” on certain

transactions. In fact pattern 1,65 12 individuals owned all of the common stock of Q, a State M

corporation and Q’s sole class of nonvoting preferred stock, representing 40% of its value, was

held by various shareholders. Pursuant to a plan to raise capital and enhance its ability to raise

capital in the future by issuing additional stock, Q changed its state of incorporation to State N by

merging with and into R, a newly organized State N corporation. Immediately after the

62 See generally, Rev. Rul. 96-29, 1996-1 C.B. 50. 63 Id. 64 Id. 65 Rev. Rul. 96-29.

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reincorporation, R (reorganized Q) sold additional shares of stock to the public and redeemed all

the outstanding nonvoting preferred shares. All of the shares of Q stock were converted into the

right to receive an identical number of shares of R stock.66 See figure2 below.

Figure 2: Illustration of fact pattern 1 from Rev. Rul. 96-29

On this fact pattern, the IRS ruled that the reincorporation of Q into New R qualified as an F

reorganization ‘‘even though it was a step in the transaction in which Q was issuing common

stock in a public offering and redeeming stock having a value of 40 percent of the aggregate

value of its outstanding stock prior to the offering.’’67

In fact pattern 2, W, a state M corporation, is a manufacturing corporation, all of the stock

of which is owned by two individuals. W intended to acquire the business of Z, an unrelated

corporation, to combine Z’s business with the business of Y (a subsidiary of W), and to change

W’s state of incorporation. Z merged with and into Y pursuant to the law of state M, with the

former Z shareholders receiving shares of newly issued W preferred stock in exchange for their

shares of Z stock. Immediately following the acquisition of Z, W changed its place of organization

by merging with and into N, a newly organized corporation incorporated in state R. Upon W’s

change of place of organization, the holders of W common and preferred stock surrendered their

66 Id. 67 Id.

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W stock in exchange for identical N common and preferred stock, respectively.68 See figure 3

below.

Figure 3: Illustration of fact patter 2 from Rev. Rul. 96-29

In fact pattern 2, the IRS ruled that the reincorporation of W qualified as an F

reorganization, ‘‘even though it was a step in the transaction in which W acquired Z.’’69 The IRS

cited Rev. Rul. 69-516 to support the holding that a reincorporation of a corporation is treated as

an F reorganization even though the reincorporation was a step in a larger more complex

transaction in which the corporation obtained new shareholders or acquired new assets — where

if viewed together as a single transaction, would not have qualified as an F reorganization.

68 Id. 69 Id.

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The 2015 Final Regulations apply the “bubble” protection through the “Related Events

Rule.” The application of the Related Events Rule is illustrated in Reg. §1.368-2(m)(4) Ex. 6.70

In that example, P owns S1. To change S1’s place of incorporation, P forms S2 and merges S1

into S2. Immediately thereafter, P sells all of its S2 stock to an unrelated party. See figure 4 below.

In applying the Related Events Rule, P’s sale of S2 stock will be disregarded for purposes of

determining whether the merger of S1 into S2 qualifies as a F reorganization of S1. The result

would be the same if, instead of the S2 stock being sold by P, S2 merges into a previously unrelated

corporation and terminates its separate existence.

Figure 4: Illustration of the Related Events Rule

As discussed above, F reorganizations are often carried out as a step in a larger

transaction— such as reincorporating in Delaware before an initial public offering. By allowing

the reincorporation to take place within the “bubble”—without incurring potentially severe tax

consequences—firms have an easier time growing, promoting and selling their businesses.

70 Reg. §1.368-2(m)(4) Ex. 6; See also Reg. §1.368-2(m)(4) Ex. 7.

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C. Specific Requirements Set Forth in Final Regulations

The Code defines the F reorganization as “a mere change in identity, form, or place of

organization of one corporation, however effected.”71 The Final Regulations go a step further by

setting forth specific requirements that must be met in order for a transaction or a series of

transactions to qualify as a “mere change.”72 Parts 1-6 below summarize and provide official

examples of each requirement provided by the Final Regulations.

1. Resulting corporation stock distributed in exchange for

transferor corporation stock

Immediately after a potential F reorganization, all stock of the resulting corporation must

be distributed in exchange for stock of the transferor corporation in the potential F reorganization.73

However, the Final Regulations allow the resulting corporation to issue a de minimis amount of

stock to facilitate the organization of the resulting corporation or maintain its legal existence.74

This distribution requirement is illustrated in Reg. §1.368-2(m)(4) Ex. 1.75 In that example,

C owns all of the stock of X, a State A corporation. Y, a State B corporation, seeks to acquire the

assets of X for cash. To effect the acquisition, Y and X enter into an agreement under which Y

will contribute $1,000,000 to Z, a newly formed corporation of which Y is the sole shareholder, in

exchange for Z stock and X will merge into Z. In the merger, C surrenders all of the X stock and

receives the $1,000,000 Y contributed to Z. C receives no Z stock in the transaction. After the

merger, Y holds all of the Z stock, and Z holds all of the assets and liabilities previously held by

71 § 368(a)(1)(F). 72 See generally T.D. 9739, 80 Fed. Reg. 56,904 (Sept. 21, 2015). 73 Treas. Reg. § 1.368-2. 74 Preamble, at 56908; Treas. Reg. § 1.368-2(m)(1)(i). 75 Reg. § 1.368-2(m)(4) Ex. 1.

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X. See figure 5 below. The result of this transaction is that the merger of X into Z is not a mere

change of X, because Z stock was not distributed to X’s shareholders in exchange for X stock.

Instead, C receives cash in exchange for his stock and as a result, the transaction does not qualify

as a reorganization under section 368(a)(1)(F).76

Figure 5: Illustration of Example 1 from Reg. § 1.368-2(m)(4)

Conversely, consider the following example of a potential transaction that would qualify

as an F reorganization. X, a State A corporation wishes to move its domicile to State B. X’s

shareholders form NewCo in State B and effectuate the merger of X into NewCo. In the

transaction, NewCo exchanges 100% of its stock to X’s shareholders in exchange for 100% of X’s

stock. As a result of the transaction X’s shareholders now own the surviving company, NewCo in

State B. Under these circumstances, the merger of X into NewCo would satisfy Treas. Reg. § 1.368-

2(m)(1)(i).77

76 Treas. Reg. § 1.368-2(m)(4) Ex. 1. 77 See Treas. Reg. § 1.368-2(m)(1)(i) (requiring that all stock of the resulting corporation must be distributed in

exchange for stock of the transferor corporation in the potential F reorganization.).

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2.   Identity of Stock Ownership

The same person or persons must own all the stock of the transferor corporation at the

beginning of the potential F reorganization and all of the stock of the resulting corporation at the

end in identical proportions.78 The 2015 Final Regulations provide that a transaction that involves

the introduction of a new shareholder or new equity capital into the corporation “in the bubble”

does not qualify as an F reorganization.79 The 2015 Final Regulations reflect both the 2004

Proposed Regulations and the U.S. Supreme Court’s holding in Helvering v. Southwest

Consolidated Corp, which held that “a transaction which shifts the ownership of the proprietary

interest in a corporation is hardly ‘a mere change in identity, form, or place of organization.’”80

However, this requirement is not violated if one or more holders of stock in the transferor

corporation exchange stock in the transferor corporation for stock of equivalent value in the

resulting corporation, with different rights from those of the stock in the transferor corporation, or

receive a distribution of money or other property from either the transferor corporation or the

resulting corporation, whether or not in exchange for stock in the transferor corporation or the

resulting corporation.81

In Example 2 of Reg. §1.368-2(m)(4),82 A owns 75%, and B owns 25%, of the stock of X,

a State A corporation. The management of X decides to reorganize X under the laws of State B.

Accordingly, X forms Y, a State B corporation, and X and Y enter into an agreement under which

X will merge into Y. In the merger, A surrenders A's X stock and receives cash, and B surrenders

all of B's X stock and receives all the stock of Y. See figure 6 below. The change in ownership

78 Treas. Reg. § 1.368-2(m)(1)(ii). 79 Preamble, at 56908. 80 Helvering v. Sw. Consol. Corp., 315 U.S. 194, 202–03 (1942). 81 Treas. Reg. § 1.368-2(m)(1)(ii). 82 Treas. Reg. § 1.368-2(m)(4) Ex. 2.

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caused by A's surrender of X stock results from a distribution and exchange. Therefore, the merger

of X into Y is a mere change in form of X and qualifies as a reorganization under section

368(a)(1)(F). However, A's surrender of X stock for cash is treated as a transaction, separate from

the reorganization, to which a different section of the Code would apply.83 Although occurring

simultaneously with the mere change of company X, the 2015 Final Regulations state that such a

distribution is functionally separate from the mere change, and should not be treated the same as

an exchange of money or other property for stock of a target corporation in an acquisitive

reorganization.84 This viewpoint differs slightly from the 2004 Proposed Regulations.

Figure 6: Illustration of Example 2 from Reg. §1.368-2(m)(4)

The 2004 Proposed Regulations held that a distribution to a shareholder occurring

simultaneously with an F reorganization would be treated as distributed by the Transferor

Corporation immediately before the transaction.85 In contrast, the 2015 Final Regulations treat a

shareholder distribution occurring simultaneously with an F reorganization, as an unrelated,

separate transaction, whether or not connected in the formal sense.86 This example proves one of

83 Id. 84 Preamble, at 56911; See § 1.301-1(l); see also Bazley v. Commissioner, 331 U.S. 737 (1947) (holding that a

distribution in the context of a purported E reorganization is treated as a dividend.). 85 Preamble, at 56907. 86 Treas. Reg. § 1.368-2(m)(3)(iii).

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the greatest values in an F reorganization—the ability to treat simultaneous transactions as separate

and unrelated steps, thus allowing an F reorganization in order to facilitate a larger more complex

transaction.

3. Prior assets or attributes of resulting corporation

The resulting corporation must not any property or have any tax attributes immediately

before the potential F reorganization.87 The definition of “tax attributes” poses a potential hurdle

to any potential F reorganization if not narrowly defined. A Treasury official recently commented

on what constitutes a tax attribute for purposes of this F reorganization requirement, and stated

that ‘‘we intended for this to refer to federal tax attributes, not state or foreign.’’88 The resulting

corporation holding a de minimis amount of assets to facilitate the organization of the resulting

corporation or maintain its legal existence, and having tax attributes related to holding those assets,

and does not violate this requirement.89

The prohibition on holding pre-transaction tax attributes is illustrated in Reg. §1.368-

2(m)(4) Ex. 4.90 P is a holding company that owns all outstanding stock of manufacturing business

S. P owns no assets other than stock of S. P’s shareholder decides to eliminate the holding

company structure by merging P into S. See figure 7 below. Under Reg. §1.368-2(m)(1)(iii), the

merger of P into S is not a mere change because S holds property and has tax attributes immediately

before the Potential F Reorganization.91 Similarly, if S were to merge into P, the same result would

occur because P, the potential resulting corporation, holds S stock and tax attributes related to

87 Treas. Reg. § 1.368-2. 88 See Amy S. Elliot, ABA Meeting: Only Federal Attributes Count for Third F Reorg Requirement, 2016 TNT 21-8

(Feb. 2, 2016)(emphasis added). 89 Treas. Reg. § 1.368-2(m)(1)(iii). 90 Treas. Reg. § 1.368-2(m)(4) Ex. 4. 91 Id.

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holding S stock.92 This requirement would be satisfied, however, if S were to merge with and into

a newly created shell company — which had no federal tax attributes. This scenario would be

beneficial where the parent company desired to reincorporate its subsidiary in another jurisdiction.

Figure 7: Illustration of Example 4 from Reg. §1.368-2(m)(4)

4. Liquidation of transferor corporation

To qualify as an F reorganization, the transferor corporation must completely liquidate in

the reorganization for federal income tax purposes.93 This requirements reflects the statutory

directive that F reorganizations only involve a single corporation.94 Similar to the 2004 Proposed

Regulations, the 2015 Final Regulations stipulate that “the Transferor Corporation is not required

to legally dissolve and is allowed to retain a de minimis amount of assets for the sole purpose of

preserving its legal existence.”95 This rule ensures that there is no way to continue operating the

transferor corporation as a taxable business after the F reorganization.

5. Resulting corporation is the only acquiring corporation

92 Id. 93 Treas. Reg. § 1.368-2(m)(1)(iv). 94 Supra note 8; See generally Boris I. Bittker and James S. Eustice, Federal Income Taxation of Corporations and

Shareholders (7th ed. 2008). 95 Preamble, at 56909.

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Immediately after the potential F reorganization, no corporation other than the resulting

corporation may hold property that was held by the transferor corporation immediately before the

potential F reorganization if the other corporation would, as a result, succeed to and take into

account the items of the transferor described under section 381(c),96 which provides conditions

and procedures for net operating loss carryovers in certain corporate transactions. This “resulting

corporation” requirement addresses overlap concerns in triangular asset reorganizations where a

controlling corporation is a party to the reorganization scheme and, without this restriction, would

otherwise reap the tax benefits of an F reorganization through its subsidiary.

In Example 9 of Reg. § 1.368-2(m)(1)(v),97 P owns 80%, and A owns 20% of the stock of

S. A and P decide to completely liquidate S while A continues to operate part of the business of

S in corporate form. Accordingly, S distributes 80% of its assets to P and 20% of its assets to A

and S dissolves. A contributes the assets it receives from S to newly incorporated New S in

exchange for all of the stock of New S. See figure 8 below. S's distribution of 80% of its property

to P as part of the complete liquidation of S meets the requirements of section 332. Thus, section

381(a)(1) applies to P's acquisition of 80% of the property held by S immediately before the

transaction. Under this section, the potential F reorganization in which 20% of the property held

by S immediately before the transaction is transferred to New S cannot be a mere change in form

of S, because section 381(a) applies to P's acquisition of property held by S immediately before

the potential F reorganization.98

96 Treas. Reg. § 1.368-2(m)(1)(v); See also § 368 (West) (defining “control” as the ownership of stock possessing at

least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of

the total number of shares of all other classes of stock of the corporation.). 97 Treas. Reg. § 1.368-2(m)(4) Ex. 9. 98 Id.

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Figure 8: Illustration of Example 9 from Reg. §1.368-2(m)(1)(v)

6. Transferor corporation is the only acquired corporation

Immediately after the potential F reorganization, the resulting corporation may not hold

property acquired from a corporation other than the transferor corporation if the resulting

corporation would, as a result, succeed to and take into account the items of such other corporation

described in section 381(c).99 This rule is meant to prevent the simultaneous F reorganization of

two corporations into a single resulting corporation. As illustrated in Example 14 of Reg. § 1.368-

2(m)(4) and Figure 6 below, only one corporation may “reorganize” as an F reorganization into

the resulting corporation.100

In Example 14 of Reg. § 1.368-2(m)(4),101 P owns all the stock of S1 and S2. The

management of P determines to merge S1 and S2 to operate as a single corporation. P forms S3

and S1 and S2 simultaneously merge into S3. Immediately after the merger, P owns all the stock

of S3. Each of the mergers can be tested as a potential F reorganization. See Figure 9 below.

99 Treas. Reg. § 1.368-2(m)(1)(vi); See § 381(c), discussing conditions related to net operating loss carryovers in

certain corporate acquisitions. 100 Treas. Reg. § 1.368-2(m)(1)(vi) Ex.14. 101 Treas. Reg. § 1.368-2(m)(4) Ex. 14.

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However, immediately after the simultaneous mergers, the resulting corporation, S3, holds

property acquired from a corporation other than the transferor corporation, and section 381(a)

would apply to the acquisition of such property. As a result, under this section, neither of the

“reorganizations” into S3 (the resulting corporation) would qualify as F reorganizations. However,

the example goes on to say that the result of such a transaction would be different if the mergers

were not simultaneous. If S1 completed its merger into S3 before S2 began its merger into S3, the

merger of S1 into S3 would qualify as an F reorganization but the merger of S2 into S3 would not

so qualify (although it would qualify as a reorganization under sections 368(a)(1)(A) and

368(a)(1)(D)). In such a case, at least one of the reorganizations would qualify as an F

reorganization.

Figure 9: Illustration of Example 14 of Reg. §1.368-2(m)(4)

IV. Comments and Recommendations Concerning Open Issues

A. Overlap and Non-integration Application

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The 2015 Final Regulations explain that in certain circumstances, a potential F

reorganization would qualify both as an F reorganization and as a reorganization under another

provision of section 368(a)(1).102 The Treasury provided the following rules to determine which

Code subsection will have priority when overlap occurs:

If a Potential F Reorganization:

i. Qualifies as a reorganization under another provision of 368(a)(1);

and

ii. A corporation with 368(c) control103 of the Resulting Corporation is

a party to the reorganization, then the Potential F Reorganization

will not qualify as an F reorganization.104

If the Potential F Reorganization also qualifies as:

iii. A reorganization under both section 368(a)(1)(F) and one or more

of sections 368(a)(1)(A), 368(a)(1)(C), or 368(a)(1)(D), then for all

federal income tax purposes the potential F reorganization will

qualify as a reorganization only under section 368(a)(1)(F).105

One of these overlap rules provides for a scenario where the “bubble” protection of an F

reorganization is precluded by other Code sections.106 The most important take away from this

overlap rule is that it seems to create a scenario where a transaction may initially appear to be a

valid F reorganization, but nonetheless fails to qualify. Nonetheless, the F reorganization still

reaps the benefits of being excluded from the applicability of the step transaction doctrine.

However, the 2015 Final Regulations provide some potentially vague language when protecting F

reorganization from the step transaction doctrine. The Treasury concluded that step transaction

102 Treas. Reg. §1.368-2(m)(3)(iv). 103 See § 368(c)(West)(“control means the ownership of stock possessing at least 80 percent of the total combined

voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other

classes of stock of the corporation.”). 104 Treas. Reg. § 1.368-2(m)(3)(iv)(A). 105 Id. at § 1.368-2(m)(3(iv) (B). 106 Id.

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principles “generally” should not re-characterize F reorganizations.107 The use of the word

“generally” poses the question: when do the step transaction principals not apply to an F

reorganization? Was the Treasury merely implying that the overlap rules (listed above) are the

only scenarios where F reorganization qualification will be denied? Or are there other scenarios

where a potential F reorganization will fail to qualify due to the integration of the step transaction

doctrine? This is a specific question on which it would be helpful for Treasury or IRS to provide

guidance on.

B. Revenue Ruling 68-349: Does it Contradict the 2015 Final Regulations?

In Rev. Rul. 68-349,108 individual A owned appreciated property that Y corporation desired

to acquire for use in its business. X corporation was then created, and Y transferred all of its assets

to X in exchange for X voting stock. At the same time, A transferred the appreciated property Y

desired to acquire to X in exchange for X voting stock. Y then distributed the X stock received to

its shareholders in exchange for their Y stock. Thereafter, X continued the operation of the

business formerly conducted by Y. The Ruling concluded that the transfer by Y of all of its

properties to corporation X in exchange for voting stock of X and the assumption of Y's liabilities

was a reorganization under section 368(a)(1)((F) of the Code.109 In this Ruling, the resulting

corporation issued stock to multiple transferors. By allowing the introduction of a new

shareholder “in the bubble,” this Ruling seems to directly contradict Reg. § 1.368-2(m)(1)(ii). This

Ruling has not yet been revoked and requires further clarification or revocation by the IRS.

C. Distributions: How much is too much?

107 Preamble, at 56910. 108 Rev. Rul. 68-349, 1968-2 C.B. 143 (IRS RRU 1968). 109 Id.

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The 2015 Final Regulations provide that distributions made by the transferor corporation

during a potential F reorganization are treated as unrelated and separate transactions.110 Therefore,

if a shareholder receives money or other property from the transferor corporation or the resulting

corporation in a potential F reorganization, then the receipt of money or other property is treated

as an unrelated, separate transaction from the reorganization, whether or not connected in a formal

sense.111 This “non-integration” rule has been helpful in allowing transactions to qualify as F

reorganizations when they would otherwise fail the one or more of the requirements provided in

the 2015 Final Regulations. However, there remains uncertainty as to when these distributions

become too significant and affect the potential F reorganization qualification. The 2015 Final

Regulations briefly expounds on potential F reorganizations made simultaneous with liquidations

under section 332 of the Code. In their example, corporation P owns all of the stock of corporation

T, and T operates two separate businesses, Business 1 (worth $297) and Business 2 (worth $3). T

merges into newly formed corporation R, and P receives Business 1 and all of R's stock in exchange

for surrendering all of the T stock, and R receives Business 2.112 Because T transfers 99 percent

of its historic business assets (Business 1) to P in exchange for all of T's stock, the transaction

might qualify as a complete liquidation under sections 332 in addition to an F reorganization. The

preamble states that the overlap of a section 332 and an F reorganization would cause “uncertainty

as to which corporation should succeed to T's tax attributes.”113 However, the example they used

involved a 99% liquidation into a parent.114 What if the liquidation was not to that extent? The

110 Treas. Reg. § 1.368-2(m)(3)(iii). 111 Id.; See also § 1.301–1(l). 112 Preamble, at 56909. 113 Id. 114 Id.

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distinction between an F reorganization with a distribution and a section 332 liquidation becomes

significant.

For example, if a distribution is substantial enough to implicate the overlap rule (asset

reorganization or liquidation under 368(a)(1)), there may be uncertainty as to which Code section

will govern. It would be helpful if the Treasury and IRS could offer guidance on a transaction in

which a potential F reorganization takes place, but the distribution of money to a parent company

re-characterizes the transaction as a liquidation under section 332 of the code. In this scenario,

there would be a violation of Treas. Reg. § 1.368-2(m)(1)(v) (requiring a single acquiring

corporation). For example, assume that P is the sole shareholder of T and wants to reincorporate

T in a new state. T then merges with newly formed R with R surviving. However, simultaneously,

T distributes 75% of its cash to P. Typically, the non-integration rule would allow F reorganization

status to the T-R transaction (the distribution to P would be treated as a separate transaction due to

the “bubble”). However, the distribution of cash to P may be re-characterized as a liquidation into

an 80% parent under section 332 of the Code.115 If this were the case, the single acquiring

corporation requirement would be violated because P is essentially the parent of R and thus, there

seems to be multiple acquiring corporations. There remains uncertainty as to how significant a

distribution may be (50%, 75%, 90% of assets?), when made simultaneously with an F

reorganization, without re-characterizing the transaction as a mandatory section 332 liquidation

and thus destroying F reorganization protection.

D. EIN Issues

115 See generally § 332 (West); See also § 368.

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The Preamble to the 2015 Final Regulations provides that the Treasury and the IRS are

studying how to assign (or reassign) employer identification numbers (“EINs”) to taxpayers

following an F reorganization, including in cases in which the transferor corporation remains in

existence as a disregarded entity.116 There remains uncertainty about the assignment of the EIN

following an F reorganization as illustrated by conflicting language in a Private Letter Ruling

(“PLR”) and the Internal Revenue Manual (“IRM”). Specifically, there is uncertainty as to weather

a corporation that converts to an LLC in a drop and check election must retain its historic EIN.

PLR 201236014117 illustrates this example. In this ruling, Parent, a corporation, formed New

HoldCo. New HoldCo formed MergerCo as a wholly owned subsidiary. MergerCo then merged

with Parent, with Parent surviving. The shareholders of Parent had their shares converted to New

HoldCo stock. New HoldCo then became the holding company of Parent. Parent then converted

to an LLC named Parent LLC, which was allowed to default to a disregarded entity. The letter

ruling states, “The Reorganization will qualify as a reorganization within the meaning of section

368(a)(1)(F),” and “New HoldCo will continue to use the taxpayer identification number

previously assigned to Parent.”118 PLR 201236014 allows the historic EIN of Parent corporation

to be used by New HoldCo—a different legal entity—even though Parent continues to exist as a

single-member LLC. This holding is inconsistent with IRM section 3.13.2.9.20, which states that

“If an Entity reorganizes/converts at the state level and maintains the same structure . . . the entity

may retain their EIN.”119 Based on IRM section 3.13.2.9.20, Parent should have kept its EIN,

however, NewCo is now using that EIN. The IRS should issue guidance on whether a corporation

that converts to an LLC in a drop and check election must retain its historic EIN.

116 Preamble, at 56911. 117 I.R.S. PLR 201236014 (IRS PLR Sept. 7, 2012). 118 I.R.S. PLR 201236014 (IRS PLR Sept. 7, 2012) (citing Rev. Rul. 73-526, 1973-2 C.B. 404). 119 Internal Revenue Manual, Section 3.13.2.9.20.

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E. Is F reorganization treatment available for reverse mergers?

On occasion, companies that wish to go public choose a route that does not involve an initial

public offering (“IPO”). This scenario may occur in the event that the fundraising element of an

IPO is not necessary or relevant for the specific company. Generally, these are companies that

have existing revenues, profits and perhaps audited financial statements. When the raising of

capital is not needed, a common way that companies go public is through a reverse merger into a

public shell corporation.

In a reverse merger, corporation A (the private transferor corporation) is merged into an

existing public shell corporation (“corporation B”)(the resulting corporation) with corporation B

surviving.120 See figure 10 below. These transactions are sometimes referred to “minnow-whale”

transactions or “back door filings.” I these cases, the public shell may be an entity that never had

any operating business but was formed to be a shell corporation that reports to the SEC or it may

be the shell of a former public company that sold off its business but stayed in existence.

Nonetheless, a reverse merger offers a cheaper and more expedited process to go public than the

traditional IPO.

Figure 10: Illustration of a Reverse Merger

120 Brian Angstadt and Rick Gove, Final F Reorganization Regs. Might Make Treatment Available for Reverse

Mergers, The Tax Advisor (Februrary 1, 2016), available at http://www.thetaxadviser.com/issues/2016/feb/f-

reorganization-regs-might-make-treatment-available-for-reverse-mergers.html#sthash.TystEmuA.dpuf

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A company may wish to take advantage of the tax-free F reorganization provisions of section

368 of the Code when contemplating a reverse merger. However, generally in a back door public

filing, the party who owns the public shell corporation is a third party to the operating business

that wishes to go public. This may cause difficulty in ensuring that the reverse merger qualifies

as an F reorganization because of the different shareholders of each company.121

For example, any stock issued before a reverse merger, and any stock held by the historic

shareholders of the resulting corporation, may prevent the reverse merger from meeting the first

and second requirements of the 2015 Final Regulations (exchange of stock and identity of stock

ownership).122 This issue may be resolved, however, by issuing enough stock of the resulting

corporation in the reverse merger to historic shareholders of the transferor corporation to ensure

that the de minimis exceptions apply.123 These exceptions are explained in Example 3 of the 2015

Final Regulations,124 where the stock of the resulting corporation issued before the F

reorganization makes up less than 1% of the stock in the resulting corporation after the transaction,

121 See supra note 71. 122 Id. 123 Supra note 114. 124 Treas. Reg. § 1.368-2(m)(4) Ex. 3.

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with the other 99% held by the shareholders of the transferor corporation. The issuance of the stock

to the 1% shareholders would not cause the transaction to be disqualified as an F reorganization

because it will be considered a de minimis issuance of shares. Under the second requirement of

the 2015 Final Regulations,125 the ownership of the transferor corporation and resulting

corporation immediately before and immediately after the F reorganization must be identical,126

however, the same de minimis exception in the first requirement applies to the second requirement.

The third requirement of the 2015 Final Regulations may, however, represent a substantial

hurdle in a F reorganization-reverse merger. If the public shell corporation had any historic assets

or attributes that have been sold-off or transferred before the reverse merger, there may be a

question as to whether the shells historical business will disqualify the F reorganization. The

preamble to the 2015 Final Regulations states that “Because an F reorganization must involve ‘one

corporation,’ and continuation of the taxable year and loss carrybacks from the Resulting

Corporation to the Transferor Corporation are allowed, the statute cannot accommodate

transactions in which the Resulting Corporation has preexisting activities or tax attributes.”127 The

question that remains open is whether the definition of “preexisting activities,” as articulated in

the 2015 Final Regulations, includes the “historic”—but no longer present—business of the shell

company? If “preexisting activities” is interpreted to include all past business activities, including

operations or assets no longer associated with the now “shell” company, then it may preclude F

reorganization qualification for many reverse merger transactions. It may be beneficial for the

Treasury or IRS to clarify whether “preexisting activities” relates to activities that are current at or

125 Treas. Reg. § 1.368-2(m)(1)(ii). 126 Supra Section III (C)(2). 127 Preamble, at 56906 (emphasis added).

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immediately before the potential F reorganization or if they also include historical business

activities which are not present at the time of the potential F reorganization.

V. Conclusion

The 2015 Final Regulations seem to represent a return to a “form” over “substance” analysis.

The carefully crafted provisions of the 2015 Final Regulations creates certainty for practitioners.

As one government attorney said: “That kind of certainty helps facilitate tax administration from

the government's perspective and helps taxpayers.”128 However, the potential downside to this

“bright-line” and “form” driven process is that some potential F reorganizations may be arbitrarily

disqualified due to their inability to strictly fall within the requirements (set forth in the 2015 Final

Regulations) but which otherwise substantively represent a “mere change.” Nevertheless, with the

form driven analysis, most practitioners will enjoy greater certainty due to the bright-line tests

provided by the Final Regulations. With the promulgation of the 2015 Final Regulations, the F

reorganization path has certainly become clearer than ever. Yet, as discussed above, there remain

several questions that—if left unanswered by the IRS—will leave a certain element of uncertainty

in many transactions.

128 Laura Davis and Brett Ferguson, F Reorganization Rules Highlight Importance of Form, Daily Tax Report (Nov.

6, 2015)(quoting Marry Paulsen), available at http://www.bna.com/reorganization-rules-highlight-n57982063250/.